TERRENCE MURRAY – ‘Tough environment’
Massachusetts banks performed well in the first quarter of the year, despite the overall slowing of the economy.
At the end of the fourth quarter, many analysts were predicting bad loans and funding problems would hurt banks during the first part of 2001. While national banks such as Bank of America did experience problems with bad loans and Massachusetts banks saw core deposits shrink, many experienced continued good performance in the first quarter.
Abington Bancorp, the $7.6 million-asset holding company for Abington Savings Bank, reported a 9 percent increase in its first-quarter earnings.
“Earnings continue to be driven by the growth of our core retail franchise,” said James P. McDonough, president and chief executive officer. Income from the first quarter totaled $1.2 million. Deposit balances grew at a rate of about 21 percent. “Retail banking has been, and continues to be, a core strength of our franchise,” said McDonough.
“Most banks’ earnings are going to be up for the quarter by a significant amount because they were able to get their funding costs down,” said George K. Darling, chief executive officer and founder of Newburyport-based Darling Consulting Group.
Although predictions of a slowing economy made analysts in other industries skeptical of positive first-quarter results, community banks benefited from dropping interest rates. Darling said it wasn’t surprising to him that banks did fairly well because most of the banks have received wholesale funding from the Home Loan Bank. The costs of those funds dropped on average about 2 percent over the quarter, said Darling.
The $3.5 million-asset Hingham Institution for Savings experienced a 26 percent increase in net income over the same period last year, mainly attributed to expansion of its balance sheet. Net income was $1.2 million in the first quarter, an increase over the first quarter of 2,000 that totaled $984,000. Total deposits and total loans have increased 14 percent, according to Robert H. Gaughen Jr., president of the bank. The asset quality of the bank remained good overall and it boasted no loans over 60 days in arrears and no foreclosures.
Now, well into the second quarter Darling said banks should continue to do well.
“I see very little evidence that this is not going to continue into the second quarter. The real question’s going to be the third and fourth quarters, because a lot of banks may have mortgages that prepay or they might have callable agencies on their books that get paid down,” he said.
Restructuring
Reinvesting the cash that comes in can be a problem because yields on reinvestment opportunities are low today. “The rates have come down both on the funding side and the asset side and most of the banks have the ability to lower their funding costs this first quarter and probably through the first half of the year. But beyond that, my guess is that you’ll start seeing the asset yields start to drop,” said Darling.
With the Federal Reserve cutting interest rates yet again, banks may use this time to prepare for the next growth cycle. Banks can sell assets that have extended risk such as mortgages and invest in shorter-term maturities.
“You’ll see that a lot of banks have done this restructuring in the first quarter,” said Darling.
While FleetBoston Financial is the largest bank to come out of New England in a long time, it didn’t suffer the same wounds as other large banking companies because it focused on small business, said analysts. Shortly after posting $870 million in first-quarter earnings – adjusted for repositioning of the business portfolio – FleetBoston went back to its roots in announcing a refocusing on the customer. The nearly 5-cent drop in earnings per share, 79 cents for the first quarter of this year compared to 84 cents from the first quarter of 2000, was attributed to the Summit acquisition and divestitures.
Considering the sale of the Fleet Mortgage Group, the Summit acquisition, the downsizing and restructuring of its Robertson Stephens and Quick & Reilly divisions, actual first-quarter income was $142 million, which represents 12 cents per share, as compared to $1 billion last year.
“The U.S. economic downturn presented the financial services industry with a very tough environment in the first quarter, particularly for our capital markets businesses, which experienced a sharp decline in earnings from the robust setting of a year ago,” said Terrence Murray, Fleet chairman and chief executive officer.
Sovereign Bank is also making serious strides towards becoming a “New England” bank. It posted a 189 percent increase in first-quarter deposit fees over last year. Cash earnings totaled $88.1 million, up from $60.4 in the first quarter last year.
Nationally, banks fared about the same.
According to a report by Salomon Smith Barney, profits in American banks were strong for the first quarter. The profits are attributable to diversification in bank product lines. While credit problems for consumers are increasing, the numbers remain low overall, also boosting banks’ bottom lines in the first quarter.
